Wednesday, May 2, 2012

How to slash unemployment.

The unemployed are unsold labour. If something is unsold, it can normally be sold by reducing its price.

But reducing the price (in money terms) of ALL LABOUR is fatuous because that just reduces demand. And in any case, most labour is not unsold: it is employed even in a recession. I.e. there is no need to reduce the price of “sold” labour.

So how about reducing the price of UNSOLD labour, i.e. make the unemployed available to employers at a price well below the going rate / union rate / minimum wage, etc? That would cut employers’ marginal costs.

Assuming demand is raised by the requisite amount, employment would rise, on the courageous assumption that employers don’t replace too many EXISTING employees with the newly available subsidised employees.

But hang on. Why not just raise demand and not bother with the subsidy? The reason lies in a labour market characteristic that was highlighted by some recent research, namely that the unemployed are relatively UNSUITABLE potential employees. This point has always been intuitively obvious to those with an understanding of labour markets (0.001% of the population). But the latter research showed that employers in the U.S. say they have about as much difficulty now obtaining suitable labour from the ranks of the unemployed as before the recession.

In short, the above proposed subsidy would make up for UNSUITABILITY.

Put another way, the subsidy would counteract the fact that when demand is raised, the effect is simply to bid up the price of suitable labour, rather than result in more jobs for the unemployed.

Unsuitability of specific individuals changes.

To over-simplify the issue a bit, let’s divide the workforce into two groups: the suitable and the unsuitable. And let’s assume the suitable are employed and the unsuitable are unemployed.

If the stock of individuals making up the unemployed never changed (i.e. a given stock of individuals was permanently unemployed) then implementing the above subsidy would be easy enough: just attach the subsidy to all those individuals currently unemployed.

But it’s more complicated than that: someone can be unsuitable / unemployed because there is a temporary surplus of their skills in their travel to work area, and then find a few months later that there is demand for those skills.

So how do we stop employers claiming the subsidy in respect of individuals who are in fact suitable? Well it’s not too difficult in principle.

Just limit the time for which a specific individual can stay with a given employer on a subsidised basis. Perhaps limit the time to three months or so.

That way, if at the end of the three months the employer GENUINELY thinks some individual is unsuitable, the employer will be happy to let the individual go: so the subsidy will have served a purpose: it will have facilitated the employment of an unsuitable individual for three months.

In contrast, if the employer thinks the individual is SUITABLE, the employer will want to keep the employee. In which case the subsidy comes to an end.

The latter arrangement could be refined. For example the fact that an employer keeps an employee AFTER the subsidy expires indicates the employee was suitable BEFORE the subsidy expired. Thus it could make sense to charge such an employer for part or all of the three months worth of subsidy.